Transcript
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BHARAT MUNIM 35
MAHUL NAGDA 36
PRANAY NARVEKAR 38
DOLLY PAREKH 39
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HP COMPAQ
INTRINSIC VALUE $50 billion $31.5 billon
NO. OF EQUITY SHARE
HOLDERS
1 billion 1billion
VALUE PERSHARE $50 $31.5
SWAP RATIO 1 0.63
HP HPQ COMPAQ1 share 0.63 share
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Agreement between 2 parties to exchange
cash flows in future
Riskiness of the transactions
First swap- negotiated in 1980s
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Exchange ofa stream of interest payments
for other partys stream of cash flows.
Used by hedgers
Used by speculators
Highly liquid instruments
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Structure of Interest Swaps:
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Illustration: A hypothetical 3-year swap initiated on March 5, 2010.
Semi-annual interest payments.
Tata Motors Ltd agrees to pay Maruti Udyog Ltd a fixedinterest rate of 8% per annum.
Maruti agrees to pay 6-month LIBOR rate to Tata.
Notional principle amount of Rs 100 crores.
Maruti
Udyog Ltd
Tata
Motors
Ltd
8.00%
LIBOR
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Date 6-months
LIBOR rate
(%)
Floating cash
flow received
Fixed Cash flow
received
Net cash flow
March, 5, 2010 7.6%
September 5, 2010 7.8% +380 -400 -20
March, 5, 2011 8.0% +390 -400 -10
September 5, 2011 8.1% +400 -400 0
March, 5, 2012 8.2% +405 -400 +5
September 5, 2012 8.4% +410 -400 +10
March, 5, 2013 8.5% +420 -400 +20
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Using a swap to transform a liability
Maruti
Udyog Ltd
Tata
Motors Ltd
8.3%8.00%
LIBOR
LIBOR+0.2%
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Using a swap to transform an asset:The process remains the same.
Maruti Udyog
Ltd
Tata Motors
Ltd
8.3% 8.00%
LIBOR
LIBOR+0.2%
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Overview
Structure
Illustration
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Agreement to exchangeloan
Long term financing or hedging technique
Right to offset Non-payment
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It is a series of Forward Contracts.
A currency swap is not a loan therefore does
not changes theliability structure of the
parties.There is an exchange ofPrincipal(unlike for
interest rate swaps)
The initialvalue of the contract is Zero.
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2.4mEuro $4.16m
$52m
Euro
BondMkt
US
BondMkt.
Microsoft(USMNC)
LuftahnsaAirlines(German MNC)
Luftahansa(USSubs)
Microsoft(GermanSubs)
Swap Bank(F.I)
$52m
@8%(5yrs)
40m
euro@6
%(5yrs)
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PrincipalExchange-Directly
Interest Exchange through Swap Bank
Com
parative
A
dv
antage
USCo. saves 1% on $5,20,000 over 5 yrs
German Co. saves 1% on 4,00,000 Euro over5 yrs
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SecureCheaper Debt
Hedge against risk
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Valuation with an e.g.
Other currency swaps (cross currency swap)
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